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Within developing urban economies an inherent tension exists between the twin policy goals of providing adequate access to piped water infrastructure and the affordable pricing of the on-going service. More access to immovable network infrastructure demands greater costly investment and long-term financial sustainability, while service affordability erodes both these conditions in the presence of limited to the availability of government subsidies. Policy approaches to urban water supply in developing economies prior to the 1990s was dominated by a crude affordability agenda with insufficient weight placed on the heavy capital requirements of network extension and maintenance, but a new policy consensus in more recent years has become discernable that places less stress on affordability as the primary or direct objective of urban water policy. Affordability measures are moving from general to targeted, and more importantly, are becoming conditional upon notions of infrastructure accessibility and overall cost recovery. After all, argue proponents, what use to the poor is an affordable service that is impossible for the vast majority of them to access? As a result best practices now tend to treat service affordability as an indirect or secondary policy objective, the consequence of increased productive efficiency and financial sustainability. Once these policy conditions are met, a variety

of secondary pro-poor policies can be employed in targeting producer surplus towards identifying and assisting the urban poor sustainably access critical water infrastructure. The ‘Indian’ and ‘Chilean’ Approaches to Urban Water Within the water infrastructure literature there are certainly two discernable philosophical approaches: one premised on water access as a human right or social objective that underpins the policy goal of affordability, and another that characterises water as a commodity which demands the focus of policy be placed on the financial sustainability of water utilities. The later argument is usually premised on the fact that a household water connection is characterised as a pure private good (rival and excludable), and should involve an adequate level of user payment and cost recovery. Of course most water experts advocate a pragmatic stance that inhabits the policy space somewhere between these two philosophical poles, but in the sense that they characterise two „ideal types‟ we can introduce the contrast between an accessibility-based „Chilean‟ approach and an affordability-based „Indian‟ approach to urban water provision to the poor (see comparison in Table 1). Moreover the Chilean approach has become the dominant reform paradigm adopted and actively promoted by IGOs such as World Bank, UN

The Accessibility-Affordability Tightrope in Urban Water Policy:

New Trends, New Approaches

The Accessibility-Affordability Tightrope in Urban Water Policy:

New Trends, New Approaches

Jonathon Flegg

j.c.flegg@nus.edu.sg

Jonathon Flegg j.c.flegg@nus.edu.sg

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and Asian Development Bank. The World Bank (2006: viii) put the evolution of their infrastructure agenda this way: The Bank’s first attempt to reach the poor with infrastructure services, the “basic needs” approach launched in the 1970s, produced mixed results [the Indian approach]. Starting in the 1980s and gaining momentum in the 1990s, the Bank actively promoted a new generation of initiatives aimed at helping the poor to gain access to infrastructure services [the Chilean approach].

Indian Approach

Chilean Approach

Primary Water Policy

Objective

Affordability Accessibility

Ownership Public Utilities Regulated Private

Companies Capital City

Comparison in 2004

Households Connected

69% 99%

Average Tariff (USD/per m3)

0.11 1.34

Connections Metered

33% 99%

Non-Revenue Water

53% 34%

Staff per 1000 connections

19.9 2.4

Government Operating Subsidies

61% of operating

costs

None

Targeted Pro-Poor Policies

None Means-Tested Subsidies

Table 1: A brief comparison “ideal types” of policy

approaches taken by developing economies to urban water (Irwin 1997; Komives 2005; ADB 2004, 2007)

The Indian approach to water supply reached its zenith immediately prior to the 1990s. A caricature of the typical urban water supply in developing economies at the time was one involving widespread general price subsidies, flat monthly fees rather than volumetric tariffs, and stifled public utilities struggling with low collection efficiency and high operating ratios. Populist political pressures set prices at below cost recovery, and time inconsistency, the problem of unwillingness to accept higher prices because of the poor quality of the existing service, held them there. The approach is still visible in many failing urban water utilities in India, where in the capital city of Madhya Pradesh, the Bhopal Municipal Corporation is running on an operation ratio of 5.07 and selling water on a cheaper average tariff than any utility in the country (Rs0.60/m3) (ADB 2007). As a result one-third of residents are still without a household connection. Similar situations still exist across India in cities such as Indore, Kolkata and Visakhapatnam. Le Blanc‟s analysis (2008: 38) focusing on utilities in Africa, describes the failure of the affordability-approach similarly: The traditional paradigm of consumption subsidies passed on to consumers through utilities via low tariffs has repeatedly shown its limits. In many countries, most of the subsidies given to utilities have been absorbed by inefficiencies, rather than passed on to consumers. As late as 1994 the World Bank-sponsored Algerian Urban Water Supply and Sewerage Rehabilitation Project failed because “the utilities were not turned into self-financing entities, there were no improvements in controlling leakages and reducing the level of unaccounted-for-water” (World Bank 2006: 12).

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The Chilean approach, with its stress on access, developed in the 1990s as a response to these widespread failures of utilities in urban centres across developing economies to provide adequate access to water supply. Chile‟s reform agenda was to privatise the country‟s water utilities, regulate and restrict corporate amalgamations, and to replace the cross-subsidising price structure with taxation-funded subsidises targeted at low income households (Irwin 1997; Gomez-Lobo and Contreras 2003). The pro-poor policy aims to ensuring no more than five percent of income is spent on water and sanitation (Irwin 1997). How did the Chilean Approach Eclipse the Indian Approach? The first reason is quite obvious: To propose affordable piped water presumes a priori the existence of a functioning connection. However by proposing a primary of policy goal of crude affordability over accessibility, policymakers for a long period fell into that populist yet anachronistic trap. The unfortunate result is that many poor households who actually have capacity and willingness to pay higher prices have missed out on access. The ADB (2007: 8) survey of all Indian water utilities has concluded those “with the highest coverage also have the highest tariffs, indicating that people are willing to pay for piped water.” This relation hold true in India where the substitute for a piped connection is usually free or cheaper water from a local public stand. The willingness to pay for piped water is even stronger in cities where the major substitute water source is sold from informal vendors or water trucks and usually costs many times the utility‟s tariff price. Such clear incentive structures that preference private connections seem to characterise many South East Asian urban centres, such as Jakarta, Ho Chi Minh City and Manila. Even in extremely poor urban environments, such as Lugazi, Uganda where

the capacity to pay has typically been assumed to be quite low, surveys have found a surprising high percentage willing to pay and a strong rationale for greater focus on investing in household connections (Whittington et al 1998). That the unconnected poor regularly pay many times the average tariff of similar connected consumers leads to the second reason for moving towards access as a primary policy objective: Crude affordability measures are socially regressive (Komives 2005: 171). Flat volumetric subsidies and most increasing block tariffs accrue larger overall subsidisation to larger, often middle-class consumers. For these reasons some analysts (Irwin 1997; Le Blanc 2008) have concluded even going beyond the typical Chilean approach where the water provider is responsible for targeted pro-poor subsidisation through geographic-targeting or means testing. This rationale prefers to remove all socially equity considerations for water providers. “[S]ocial concerns are legitimate, but the responsibility to assist poor customers should belong to the government, not to the utility” (Le Blanc 2008: 42). Regardless of whether the necessary pro-poor policies are best targeted from within or outside the utility (the main point is they are), a broader principle can be made about subsidisation from the Latin American experience: If it is to used then it should be used to directly provide “those goods with the highest difference between willingness to pay and costs” (Estache and Gomez-Lopo 2001: 1194). In almost all cities in developing economies this is the one-time connection fee to access the network rather than on-going costs. To the extent that subsidisation has been necessary in experience, it has been most effectively used in extending accessibility rather than for regular consumption.

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The Chilean Approach Comes to India In response to the failures of the affordability approach, accessibility has now become the primary policy objective of urban water utilities in developing economies. While political economy considerations have provided resistant to change in many cities (in particular, influential, non-poor beneficiaries of crude subsidisation), the affordability reform agenda has even begun in the most entrenched of India‟s public utilities. In March 2010 Bhopal Municipal Corporation, with the assistance of ADB, passed an order to triple average tariffs, subsidise the installation of meters, and push towards universal connection coverage at cost recovery prices. Global experience in South Asia, South East Asia, Africa and Latin America demonstrated making affordability the direct objective of water policy fails because continuing subsidisation jeopardised the financial viability of utilities and their capacity to invest in costly network extensions. Without network access subsidies either do not reach the poor or if they do they are socially regressive. Better to follow Chile‟s example of reaching cost recovery and using targeted measures to assist the poor, a process that might involve assisting with on-going costs but is even more likely to involve helping them get connected.

Bibliography

Asian Development Bank (2004). Water in Asian Cities: Utilities’ Performance and Civil Society Views. Retrieved from: http://www.adb.org/Documents/Books/Water_for_All_Series/Water_Asian_Cities/default.asp .

Asian Development Bank (2007). 2007 Benchmarking and Data Book of Water Utilities in India. Retrieved from http://www.adb.org/documents/reports/ Benchmarking-DataBook/default.asp.

Estache, A. and Gomez-Lobo, A. (2001). “Utilities Privatisation and the Poor: Lessons and Evidence from South America.” World Development 29(7): 1179-98. Gomez-Lobo, A., and Contreras. D. (2003). “Water Subsidy Policies: A Comparison of the Chilean and Colombian Schemes.” World Bank Economic Review 17 (3): 391–40.

Irwin, T. (1997). Price Structures, Cross-Subsidies, and Competition in Infrastructure. Retrieved from: http;//rru.worldbank.org/ documents/publicpolicyjournal/107irwin.pdf.

Komives, K, Foster, V., Halpern, J. and Wodon, Q. (2005). Water, Electricity, and the Poor: Who Benefits from Utility Subsidies? Washington: World Bank.

Le Blanc, D. (2008). A Framework for Analyzing Tariffs and Subsidies in Water Provision to Urban Households in Developing Countries (DESA Working Paper No. 63). Retrieved from http://www.un.org/esa/ desa/papers/2008/wp63_2008.pdf.

Whittington, D., Davis, J., and McClelland, E. (1998). “Implementing a Demand-Driven Approach to Community Water Supply Planning: A Case Study of Lugazi, Uganda”. Water International 23: 134-45.

World Bank (2006). World Bank Report - Infrastructure: Lessons from the Last Two Decades of World Bank Engagement (Report No. 35199). Retrieved from http://www-wds.worldbank.org/external/ default/WDSContentServer/WDSP/IB/2006/02/07/000160016_20060207101539/Rendered/PDF/3519910vol.01.pdf.

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